Retirees' Mortgages Can Outweigh Tax Breaks


by Amy Hoak

Source: The Wall Street Journal’s Market Watch

Planning on retiring in a low-tax state to cut costs? If you still have mortgage debt, the move may not save you that much, according to an analysis by a senior fellow at the National Center for Policy Analysis, a nonprofit, nonpartisan public policy research organization.

“More than half of those on the verge of retirement—55-to-64 year olds—are still carrying mortgage debt, and some households will carry it into retirement for many years to come,” wrote Pam Villarreal, who is the center’s expert on retirement, Social Security, economic growth and tax issues.

For her analysis, Villarreal used the center’s state tax calculator to compare tax burdens from state to state, measured by the amount of lifetime spendable income after taxes and housing or rental costs.

In one scenario, she considered a 64-year-old living in New Jersey who plans to move to Texas. This person plans on retiring at 65, earns $75,000 a year, and has a home in New Jersey valued at $300,000—with a $50,000 balance on his mortgage. (For the retirement years, the calculator figures Social Security benefits based on a hypothetical lifelong work history. It also assumes twice the pre-retiree’s annual income in a retirement account.)

New Jersey’s state income tax ranges from 3.5% to 5.5% for middle-income people (you can see a New Jersey tax worksheet here); Texas has no state income tax at all. But Villareal found that for this hypothetical taxpayer, the costs associated with having a mortgage ate up most of the tax savings.

If the retiree moves to Texas, buys a home for $300,000 and finances $50,000 over 20 years, his monthly payments would be $642 a month (at a 5% fixed rate). And he would gain only $242 a year in annual discretionary income, compared to what he would have spent if he stayed in New Jersey. (If he lives to 100, he’d have a lifetime gain of $12,026.)

But if this same person bought a $250,000 home in Texas with the proceeds of his previous home (and didn’t need a mortgage), he’d have an additional $5,405 in annual discretionary income—amounting to $239,226 over his lifetime.

“While paying down higher-interest debt, such as credit cards, should take first priority, those who have only mortgage debt should think carefully before taking on another mortgage or extending their existing one,” Villarreal wrote.